Monitoring Accounts Payable key performance metrics can have a direct impact on your business’ bottom line. But measuring the success of your AP process requires more than tracking how many invoices are past due.
Traditional accounting departments are wrought with inefficiencies, overworked and crunched for time beneath a growing mountain of invoices, high staff turnover, and outdated manual processes that place heavy reliance on paper and spreadsheets.
Top-performing AP teams process nearly four times the number of invoices than bottom performers, according to American Productivity & Quality Center (APQC) benchmarking data. The cost per invoice processed is also almost five times higher in a bottom-performing organization.
Using key performance indicators (KPIs) to uncover bottlenecks and shape a strategic approach to improving your AP process builds a bounty of benefits: increasing agility, cutting costs, mitigating risk, improving cash flow, driving additional revenue, strengthening vendor relationships, and aligning the accounting department with your organization’s overarching goals.
Ultimately, the Accounts Payable key metrics you choose should reflect what matters most for your business. But four KPIs stand out as essential to improving effectiveness and efficiency.
Here are the Accounts Payable key performance metrics every AP team should be tracking to make sure you are asking the right questions and gauge the impact of process improvements throughout your performance improvement journey.
Cost effectiveness (cost per unit)
Measuring cost effectiveness is critical to understanding how well your AP operating costs are managed. Determining your total cost and dividing it by the number of invoices you process reveals your cost per unit. The lower the number, the better your AP performance.
For instance, if your AP team’s payroll is $10,000, and the team processes 500 invoices (units) in a typical month, dividing $10,000 by 500 reveals a $20 cost per unit. APQC benchmark data categorizes this organization as a bottom performer – performing worse than 75% of AP organizations.
Top performers complete the same task at a $2.02 cost per unit. The median cost per unit for invoice processing is $5.71, according to APQC data.
But keep this in mind: costs per unit can appear deceptively low if you fail to consider hidden expenses that impact your profit margins. That may include the cost of systems, mailing, printing, overpayments, late payments, and other errors.
Staff productivity (invoices processed per FTE)
Measuring the output of each employee is a good gauge of an AP team’s overall efficiency and performance. High levels indicate more productive staff, most often assisted by process improvements like standardized and automated processes.
The simplest way to determine staff productivity is to divide your annual invoice volume by the number of full-time employees in your AP Department. But companies may also measure invoice volume daily, weekly, or monthly as well – making benchmarking more complicated.
APQC shows a significant difference between top and bottom performers, at 23,333 and 6,082 invoices per FTE respectively. The median number of invoices processed per FTE is 10,853.
Also, note that not all AP staff are processing invoices. Some may be exclusively performing other activities, such as processing payments and managing vendor inquiries. Make sure that when you are measuring your team’s productivity that you are focusing on the correct utilization of your staff.
Process efficiency (number of FTEs relative to revenue)
This metric is key to grasping how well AP procedures and systems support operations. Results can play a critical role in right-sizing workforces and evaluating options for role restructuring and automation.
APQC recommends tracking the number of AP FTEs (full-time equivalents) per $1 billion in revenue. By its calculations, bottom performers need more than three times as many resources to perform the AP process - requiring 12.5 FTEs per $1 billion in revenue. Top performers showed 3.7 FTEs and the median number was 6.9.
If your business’ revenue is more or less than $1B, you can adjust APQC’s baseline metric to your revenue level to ensure that staffing levels are measured on an “apples- to- apples” basis.
Cycle time (time in calendar days from the moment an invoice is received until payment is transmitted)
This metric reveals whether your AP processes are accelerated or dragging. High cycle times generally indicate processes that need optimizing or bottlenecks in your workflow.
According to APQC benchmarks, top performers can process invoices in almost half as many days as bottom performers: at 12 vs. 23, respectively. The median cycle time is 15 days.
Accelerating workflows enables organizations to eliminate late payment penalties, maintain strong vendor relationships, and take advantage of early payment discounts.
A balanced set of benchmarks holds the key to gaining a full understanding of AP operations and optimizing performance. Once the four core KPIs are in place, finance leaders can add other Accounts Payable key performance metrics that zero in on specific improvement concerns.
Consider these important options:
Days payable outstanding (DPO). The average number of days it takes for the business to pay back its accounts payable. Top performers find the sweet spot between satisfying vendors and making sure the business has enough cash.
Vendor payment errors. To help spot trends and mitigate costly issues, divide the number of erroneous payments by the total number of transactions conducted over the same period. Errors may include incorrect amounts, duplicate payments, or wrong addresses
Average invoice approval time. Getting other departments to approve invoices quickly ranks among the biggest challenges AP teams face.
Percentage of supplier discounts captured. Depending on your company’s cash position, taking advantage of supplier discounts can reap significant rewards like savings and business credit.
Top payment methods. Too many businesses still rely on checks to pay most suppliers, even though AP Departments rank automated ACH as their preferred payment method.
AP expense as a percentage of revenue. Monitoring AP expenses as a percentage of revenue can help guide decisions about staffing counts and eliminating manual processes. This metric is calculated by dividing total AP expense by revenue over the same period.
Percentage of invoices processed straight-through. Measuring the number of invoices that could be instantly matched with purchase orders and paid without intervention can help optimize the AP process.
Many of these metrics also consider the “upstream” and “downstream” issues that affect AP performance and productivity. AP generally gets the focus for these issues, but very often price discrepancies between invoices and purchase orders are the result of issues within Procurement, and AP is forced to “chase” down the truth.
Similarly, if receiving of goods is not accurately reflected, AP must determine where the variance occurred (in the warehouse receipt or at the vendor shipment level). Errors and delays happening outside of AP may result in some of these metrics being skewed, but, remember, AP is just one part of the entire Purchase-to-Pay (P2) process.
Some of these additional metrics will help you pinpoint key issues occurring in other departments.
Effective performance measurement is essential to streamlining the AP process – leading to faster processing, lower costs, fewer errors, and decreased fraud risk.
But manually monitoring and reporting on performance isn’t a valid long-term solution, draining resources and driving costs. APQC recommends automating AP activities as much as possible, enabling organizations to easily track the entire AP process and collect data that leads to better performance insights and decision-making.
AP automation eases oversight of internal control points by prompting authorizations and reminders, identifying potential fraud, and detecting unproductive activities. Most importantly, it improves AP performance by increasing productivity, accuracy, and efficiency.
A reputable outsourcing provider can help AP Departments leverage process improvement opportunities opportunities like automation to achieve peak performance. Exceptional providers have the people, processes, and technology already in place to propel your AP Department to the top performance tier at a fraction of the cost of hiring U.S. workers.
High-performing AP teams understand success boils down to finding the balance between productivity and ensuring accurate payments. Tracking the right Accounts Payable key performance metrics and choosing the right AP partner hold the key to optimizing your AP operations – gaining the highest level of efficiency while delivering dependable outputs.